When regulators closed Columbia River Bank, they cut out a piece of the community

On Friday, Jan. 22, a line of rental cars traced a route along the Columbia River, heading toward The Dalles, Ore. It was evening, already dark, as they drove down the main street in the tiny Oregon city, past the brick church with its towering steeple, past the local newspaper office — “The region’s oldest” — and pulled up in front of a tan, two-story bank headquarters.

As men and women in suits got out, doors slamming, the phone rang inside Bob Bailey’s house, tucked among cherry orchards several miles away.

“Something is happening at Columbia River Bank,” the caller told Bailey, the bank’s retired co-founder, who owns the state’s largest cherry farm, Orchard View Farms.

As they spoke, more than a dozen government agents walked into the building and handed over an order seizing control of the bank.

In that moment, Bailey lost several million dollars — part of an estimated $20 million lost as the takeover made the bank’s stock worthless.

But he didn’t know that yet. In coming days he would learn this wealth was gone, along with the community institution he spent his life building — a bank that was important in building the town and surrounding farms.

“Psychologically, it was tough — for a lot of people,” he said.

The hidden bank crisis

The financial crisis that shook the nation in 2008 is mostly a memory on Wall Street. The recession is over, Congress has passed financial reform and big banks, once again profitable, have resumed paying bonuses.

But here on Main Street, the crisis and its costs keep mounting. Nearly every Friday for the past two years, government agents have pulled up to community banks such as Columbia River and shut them down. They’ve seized and sold more than 280 so far, from Florida to Maine, New York to California, including 14 in Washington state. With more than 800 banks still considered troubled, closures are certain to continue.

Shutdowns typically cost jobs, shareholder wealth and charitable support for the community. They also remove key local institutions. Like a coffeeshop or diner, a local bank is a hub of relationships. Business owners get to know loan officers and loan officers get to know business owners so they are better able to rely on each other in bad times. By selling closed banks to bigger banks with remote headquarters, regulators curtail local access to top decision-makers. Rather than being a bank built in the town to serve its inhabitants, the bank becomes a point on the map — and the town a mere market — for a larger entity with little or no ties to the community.

Failures also weigh deeply on the CEOs called in to turn around the troubled banks. These leaders usually haven’t caused the problems; they are seasoned pros, often retired, with successful careers behind them. In their new role, they often feel treated like criminals — subject to arbitrary rules and decisions from regulators far away.

Of course, regulators weigh these costs against a bank’s chance of survival. And many banks appear to have been in precarious financial condition when the Federal Deposit Insurance Corp. moved in to close them.

Columbia River “could have held on a little longer, perhaps,” said David Tatman, administrator of the Division of Finance and Corporate Securities of the Oregon Department of Consumer and Business Services. “But really, without significant capital it just wasn’t feasible.”

What makes it particularly tough for towns far removed from the power centers is that regulators conceal even the most basic facts about the takeovers, such as the bank’s capital position at the time of closure, and the price the FDIC got for selling it.

To dispel this secrecy, the Puget Sound Business Journal investigated the closures of Columbia River, and Frontier Bank, of Everett, Wash., conducting dozens of interviews and examining thousands of pages of documents to chronicle the efforts to save them and how their closures affected their communities.

The bank takes root

Just 21,000 people lived in and around The Dalles when Bob Bailey and his friends decided to start a bank there in 1977 — about as many as today. Most raised wheat and cherries on farms perched above the broad river and amid the rolling foothills — farms that had been in their families for generations.

Bailey, then 36, knew there weren’t enough banks in the area to keep the farms running. So he gathered “a group of young guys,” along with a “couple of older investors,” raised $800,000 and founded Columbia River Bank. After a few rough years, they hired Terry Cochran as their CEO, an ambitious young manager from the U.S. Bank branch in town.

Cochran, then 35, had grown up in rural Yakima, Wash., and under his leadership, Columbia River expanded. In the early 1990s, it went public. It purchased three smaller banks. By 2001, when Cochran retired, many of the farmers dotting the Columbia River valley banked or borrowed there. Its reach stretched north to farmers in Central Washington.

“My mom hauled me down there when they opened,” recalled Delinda “DeeDee” Anderson, a cherry farmer in The Dalles. “I was a kid, and I was opening a savings account.”

Anderson, whose Jazzercise teacher told her about the bank closure, was among the many customers who had bought shares in Columbia River. She received steady dividends as the bank churned out regular profits, and the stock rose, eventually reaching a peak of $26.45 on Nov. 30, 2006. The bank’s board and executives were well-known and recognizable by locals; their bank was an economic engine in an area that didn’t have much industry beyond agriculture.

“For years, I was just a total golden boy,” said board member Billy Booth, who retired from the bank in 2004. “People would stop me and say, ‘God, man, what a great job you’ve done. Thank you so much for encouraging me to buy your stock.’”

Customers, particularly the farmers, loved the ease of Columbia River Bank. Its loan officers understood agriculture and stayed for years, which meant they got to know the borrowers. Other big banks surrounded Columbia River’s headquarters — U.S. Bank, Bank of the West and Wells Fargo — but lots of farmers ignored them. “Big banks don’t want to mess with you unless you’re huge,” said Anderson, whose company, Polehn Farms, Inc., borrowed from Columbia River.

By the late 1980s, Columbia River had arrived. “We became the dominant financial institution in our community,” and surrounding towns, Bailey said. “In this community it was one of the bigger employers. It was very involved in community affairs. It was a go-to place for almost all the businesses in The Dalles.”

Boom comes to Bend

By the fall of 2003, the bank’s new chief executive, Roger Christensen, saw opportunity in Bend, a booming town in central Oregon, about 140 miles away. Bend’s access to the outdoors, sunny climate and relatively low-cost housing were attracting a stream of baby boomers, mainly from California. Columbia River opened two more branches there (it already had three in the area) and began making more loans to developers building houses for the newcomers.

Across the country, hundreds of community banks adopted similar strategies, making loans to developers to take advantage of growth in popular communities. Columbia River didn’t consider its lending reckless. Unlike the large mortgage companies that lent money to subprime home buyers, it made loans to experienced, longtime developers with solid projects, Cochran said. But by making more and more loans to an inflated real estate market, Columbia River and other banks grew vulnerable.

Then, in 2008, the largest financial crisis since the Great Depression swept the country, and formerly reliable customers of Columbia River could no longer make payments.

“We were loaning to good, solid borrowers and when this tsunami hit, it took out the good borrowers,” Cochran said.

Cochran, who had retired to Bend in 2001 after 20 years, returned in late 2008, at the board’s request. He was now the “turnaround CEO.” But the bank already was in dire straits. That year, Columbia River lost more than $26 million, compared with a $14 million profit the year before. Its bad loans, growing each day, rose to more than $100 million, or 9 percent of the bank’s $1.1 billion in assets, from $10 million the year before.

On Monday mornings, Cochran would drive his motor home the 140 miles from Bend to the bank’s headquarters and set up in an RV park for the week, returning to his family on weekends.

Cochran owned nearly 250,000 shares of Columbia River, but his mission to save the bank was far more personal. He had built it and he refused to let it die. Other turnaround CEOs across the country recall similar feelings, even if they hadn’t built the bank they were called in to rescue. Later Cochran would remember the feeling: “It’s like someone told you your mother has terminal cancer,” he said. You want to do everything to save her.

Trying to save the bank

Cochran and his team quickly set to work offloading bad debt. In the first nine months of 2009, they cut construction loans by more than 20 percent to $181.5 million. The bank anticipated it could recover another $16 million as borrowers scheduled sales of empty property. And there were signs of improvement: It expected to recover $6 million from borrowers who could once again make payments, according to its last quarterly earnings report in the fall of 2009.

“While it is likely some of these work-outs will experience time delays or may prove not to take place, this is the first quarter in over a year where we have this type of major improvement,” the bank said in the earnings report for that nine-month period.

Despite the optimism in the earnings report, losses continued to mount. In those same nine months, the bank lost $52 million, double its annual loss the year before. Meanwhile, the bank’s main capital level had dwindled to $23 million, or 2.07 percent of total assets — the danger zone, classifying the bank as “significantly undercapitalized,” by regulatory standards. Once a bank’s capital level sinks below 2 percent, regulators are authorized to take it over.

Exacerbating Columbia River’s problem was the skyrocketing cost of paying for deposit insurance through the FDIC, which rose to $5.1 million for the first nine months of 2009, up from $800,000 for all of 2008.

Cochran began to suspect that regulators were planning to close the bank. On the day before Christmas Eve 2009, Cochran met Richard Betz, the chairman of Columbia River, at the tiny Aurora airport south of Portland, along with the bank’s attorney, who flew in from Seattle. The group drove to the nearby town of Wilsonville. The bankers had an afternoon meeting with the Oregon Department of Consumer and Business Services, Columbia River’s regulators. Cochran, Betz and their attorney wanted to update the state officials on their plans to raise money.

A year earlier, Columbia River had applied for funds under the federal Troubled Asset Relief Program (TARP) but had not received funds, Cochran said. So, in addition to working out the bank’s bad loans, he had embarked on a search for additional capital.

Officials plan closure in secret

Cochran told state regulators Tatman and his colleague, Dick Renken, that Columbia River now had several viable plans to raise capital. Cochran said he had a letter of intent to sell three Bend branches to a local credit union, a move that would provide some capital.

In addition, Cochran had lined up two groups of potential private equity investors, both of which appeared to be nearing a formal agreement that was to be worked out in the first quarter of 2010, public records show. Regulators had doubts that the money would actually arrive, according to a later interview with Tatman.

“We had grave concerns,” Tatman said.

Finally, the bank planned to ask shareholders to increase its shares from 20 million to 225 million.

State regulators had encouraged Columbia River to work out solutions, while the FDIC had been far more discouraging, Cochran said. The FDIC, for example, was not in favor of Columbia River selling branches to raise money, he said. It also had frowned upon the bank’s plan to raise private equity. The FDIC declined to comment.

Now, in the December meeting, state regulators said that the bank’s survival was dependent on its numbers, according to public records and some people familiar with the meeting. State regulators worried: Could the bank offload enough loans to improve its capital position? Would the other options — private equity or a stock sale — really come through?

While Cochran and his team left the meeting with a new resolve to save Columbia River, state regulators, in consultation with the FDIC, had internally been planning its closure for more than a month, according to public records and people familiar with the bank’s seizure. As is customary, the regulators didn’t reveal that plan in the meeting.

Back in November, a few days before Thanksgiving, Renken had sent an email to his team of bank examiners under the heading “River Project.”

“Good afternoon,” read the email, obtained through a records request. “As most of you know, we will probably be involved in another bank closing in January. There is a slight possibility that it may not happen. But we will plan for the worst and hope for the best.”

In the case of a state-chartered bank like Columbia River, state officials are primarily in charge of its regulation and only they have the authority to sign an order shutting it down. But the FDIC, as the much larger agency watching over all banks, is often pulling the strings behind the scenes, particularly when a bank is in such a precarious financial situation, according to numerous people familiar with the agencies’ interactions.

Appeals for help

Shortly after the New Year, Cochran was still trying to save the bank. He sent a desperate three-page letter to Renken and Tatman, updating the regulators on Columbia River’s projections for the upcoming fourth quarter. The bank, he wrote, is “viable and solvent by dictionary and business definitions.” The bank did have more assets than liabilities. But the surplus was small and shrinking rapidly — something the regulators focused on.

Helped by a federal tax refund, Columbia River expected to post a profit in the fourth quarter, the first profit in a year. Finally, it was offloading bad loans faster than new ones were appearing. It had plans to recoup an additional $13 million in the first few months of 2010, Cochran wrote to state regulators. Still, by October of 2009 one of the bank’s main capital ratios had slipped further and was below 2 percent, which meant the bank was classified by regulators as “critically undercapitalized.” It was on life support.

By now, although he still hadn’t been told so by regulators, Cochran feared closure was imminent. He had made the unusual move of asking Oregon Gov. Ted Kulongoski to intervene, and Columbia River executives also had contacted other Oregon state and federal officials, asking for help.

In his Jan. 4 letter to regulators — with a copy to Kulongoski — Cochran pleaded with the state to allow Columbia River to survive. If given only one more quarter, Cochran argued, the bank would be able to work out a private equity infusion and sell off the Bend branches, as well as continue selling off more bad loans. Its capital levels would improve.

“The potential cost of allowing Columbia River Bank to get through one or more quarters of 2010 is much smaller than the potential and permanent damage, and costs, to the businesses, communities, taxpayers, customers, employees, other community banks and even the FDIC fund,” Cochran wrote. “We will survive if given a chance.”

Cochran said he never received a response. Inside the regulatory agency, the feeling was that the bank already had been given more than enough chances. The machinery had been put in motion for closure. Hundreds of emails were being written to coordinate the many agents who would descend on the bank in January. Regulators had to worry about vacation schedules, sick leave, even bad weather. As the bureaucratic train gathered speed, it become more difficult to stop, according to people familiar with the regulators’ thinking.

Visitors in rental cars

On that evening, residents of The Dalles noticed almost right away that something was wrong. Rarely did they spot rental cars in the downtown area. But at 5:30 p.m. on Jan. 22, several pulled into town. “If you saw two of them, you’d never pay any attention, but if you saw 20 of them, you would,” Bailey said.

The regulators climbing out of the cars were part of a mix of 20 Oregon state and 100 FDIC officials that had met that morning at the Courtyard Marriott in Portland to coordinate the closure. The rest were now at Columbia River branches around the region.

Cochran knew they were coming. The state agency had warned him. But employees did not know. They were handed press releases at 6 p.m. explaining that the state had closed Columbia River and appointed the FDIC as receiver. The bank’s assets were sold to Columbia State Bank, of Tacoma, Wash., for an undisclosed price.

Susan Maier, who runs a 250-acre cherry farm outside of The Dalles with her husband, watched the news at 11 p.m. Not only had she held an operating loan with Columbia River for two decades, and placed all her money in the bank, she also owned a significant amount of stock. Even as the bank suffered, Maier had continued buying stock, believing in its health and in Cochran, who is “a really good guy,” she said.

“I was of the belief that, let’s buy some more stock. It will do some good,” Maier said.

But as regulators took control, the stock value was wiped out, eliminating at a stroke an estimated $20 million in wealth. The losses rippled across the Columbia River Valley, and shocked the community like a plane crash might.

The closure drew tears at a Sunday sermon at a local church.

“My husband was totally panicked,” said the Rev. Donnamae Grannemann, affiliated with another church.

Many in the valley had already suffered financially over the bank’s last two years because of a steep downturn in cherry sales.

Bailey, the second-largest shareholder after Cochran, lost several million dollars. He said he and his wife had used the stock and its dividends to create a small charitable foundation that gave money to local nonprofit groups. Now, that foundation is all but depleted.

As he and others read about bailouts for larger banks, it seemed to them that the smaller ones had been treated unfairly. “You see that the big banks are saved and the little boys go away and that’s what’s going on and that’s the way it is,” he told the Business Journal later.

No “viable option”

Tatman, the Oregon regulator in charge of Columbia River Bank, said in an interview that the state waited longer than usual to close the bank because it viewed the bank as an asset to the community.

But despite Cochran’s pleading letter outlining the bank’s potential capital-raising plans, Tatman said, it appeared to the agency that Columbia River didn’t have a “viable option” for raising money. The state agency and the FDIC, for example, met with one of the private equity groups Cochran had proposed, but the regulators didn’t think the group would actually provide the funds, Tatman said.

In addition, the bank’s loans continued to deteriorate and an examination of the bank in early January found it to be in critical condition, he said. “Word was starting to get out that the bank was in dire straits and we did not want to see consumers lining up to take their money out,” Tatman said. “It was time to do something.”

Cory Streisinger, the director of the state agency who signed the order “taking possession” of Columbia River, sent an email to Kulongoski’s staff, explaining the bank’s closure, on the evening the state shut it down.

“We and the FDIC engaged in some intense discussions to ensure the bank had been given every opportunity to turn the corner,” she wrote. “However, a review of the bank’s loan portfolio in early January showed that a key measure of the bank’s solvency — called Tier 1 capital — had sunk well below the minimum level needed for the bank to remain in operation. Unfortunately, this left us with no option but to order the bank’s closure.”

Columbia River Bank’s branches, signs and the bank’s logo — a shining sun over waves — were replaced with makeshift banners touting its new owner, Columbia State Bank. The “River” in Columbia River’s name, etched into the side of its decades-old headquarters building, was scratched out.

The only consolation for residents of The Dalles was that the acquiring bank, Columbia State, is from the Pacific Northwest, said Nolan Young, the city manager of The Dalles. Before Columbia River’s closure, Young wrote a letter to the governor and state regulators pleading with them to allow Columbia River to survive. But once it was closed, another regional bank was a decent choice for taking it over, he said.

“I’m convinced Columbia State is trying hard to make the transition as smooth as possible,” Young said.

New owners bring change

Indeed, Columbia River’s new owner says it has done everything it can to ease the transition. The new bank has kept nearly all the employees stationed at the branches, so that customers wouldn’t have to deal with a new representative, said Mark Nelson, chief operating officer of Columbia Banking System, the parent of Columbia State Bank. So far, Nelson said he’s seen very little turnover among customers. “We’ve been very successful in maintaining clients,” he said in a recent interview. The bank is planning to donate more to community organizations than its predecessor.

Still, a new bank means change. Columbia State laid off about 20 percent of Columbia River’s 335 employees, although the bank wasn’t technically the one to get rid of the employees. When a bank is seized, employees are placed in temporary limbo, at which point they are technically employed by the FDIC. It’s then up to the acquiring bank to decide how many workers it will retain. Columbia State also lowered the amount Columbia River was paying customers on deposits.

While there’s little evidence that customers’ loans have been called in, many worry that may change. Anderson, the cherry farmer, wondered if Columbia State will offer as much flexibility. During a recent cherry crop downturn, she fell behind on her revolving loan payments and Columbia River helped negotiate the terms of her debt. “They helped us find a way to keep going,” she said. Nelson said Columbia Bank has kept all of Columbia River’s loans, with the exception of problem assets that went to the FDIC.

After the bank was closed, Cochran drove his motor home back to Bend. He described the months after the seizure as a “funeral mourning period.” He wrote an outraged editorial about the bank’s closure in the Bend newspaper, criticizing regulators for moving in too soon.

He has become one of a growing number of legislators and bank executives who are criticizing the federal government for refusing to let community banks save themselves. When federal regulators shut down the Bank of Idaho in 2009, state legislators asked why: The bank had just lined up a crucial $10 million capital infusion.

Cochran said he thinks they don’t want people to know that he expected the bank, considered imperiled at the time of its closure, to turn a profit if left open. He feels bad for the hundreds of bankers across the country currently trying to save their institutions. He knows many of them will fail.